Detroit pension proposal would push workers, retirees into 401(k) plan, shut out new employees
By Associated Press, September 28, 2013 - The Washington Post
DETROIT — Hoping to stanch some of the red ink flowing from Detroit, its
emergency manager is riling the workforce with a proposal to close the cityfs
pension plans to new employees by the end of the year and move the city to a
401(k)-style system that has become the norm in the private sector.
Detroitfs underfunded obligations of about $3.5 billion for pensions and $5.7
billion for retiree health coverage are part of the cityfs $18 billion debt load
and a major reason emergency manager Kevyn Orr filed for bankruptcy protection
in July.
Now, he wants to end pensions for new employees and freeze benefits to about
18,000 members. Non-taxable annuity savings will be closed to new employees and
no future contributions would be accepted after Orrfs proposed Dec. 31 gfreeze
date.h
Non-vested active system members also will be frozen out by Dec. 31.
gThey took my wages and now theyfre trying to take my pension,h said Mike
Mulholland, vice president of American Federation of State, City and Municipal
Employees. gAll of our people are saying ewhat are they doing to us?f
gWefve already given concession after concession, and now to be asked to give
up more and be put in a defined contribution plan ... they want to force us to
take something where we have no security when we retire.h
Orrfs pension plan has to be approved by Michigan Treasurer Andy Dillon and
is one of the strongest challenges to unions in the one-time organized labor
stronghold.
It also is likely to continue the parade of court challenges by union leaders
who say changes to pensions and bargained health care benefits violate
Michiganfs Constitution.
But Orr counters that federal bankruptcy law trumps state law.
James McTevia, a Detroit-area turnaround expert, said he is not aware of a
previous ruling on the matter, but adds itfs clear what Orr is trying to do.
gHe is following the natural process for a reorganization,h said McTevia, of
McTevia and Associates. gThat sets up a mechanism to make changes to the
entityfs debt structure. If the city doesnft have the money to pay (into the
pensions), what difference does the law make? If the city canft do it, it canft
do it. That contract has to be rejected and another contract has to be entered
into.h
A draft of the pension proposal was given last week to the General Retirement
System, which represents about 20,500 active and retired city workers. AFSCME
Council 25 spokesman Ed McNeil said unions have not received the draft.
In it, the city also would contribute five percent of the base pay of
non-uniformed workers to the 401-type pension plan. Overtime, bonuses and
longevity pay will not be factored into compensation as they have been in the
past. The city will make no contributions to a deferred compensation plan in
which participant contributions and earnings on retirement money are
tax-deferred.
A separate plan for police and fire retirees still is being worked on and has
not been presented to that pension system, said Bill Nowling, a spokesman for
Orr.
gBut it will be similarh to the General Retirement System plan, Nowling
said.
The police and fire system has nearly 12,700 members.
The pension systems, city unions and individual retirees are fighting Orr in
bankruptcy court. They donft believe he has proved Detroit is insolvent and
complain that he hasnft bargained in good faith.
Mary Estell, a retired Department of Public Works employee, receives a
pension of about $2,300 per month after 32 years with the city. She realizes the
likelihood of getting more is unlikely.
gAt this point, there is nothing we can do,h Estell said of Orrfs pension
plan. gThe city doesnft have any money, so we wonft get any increase. If the
bankruptcy doesnft go through, then maybe therefs a chance we will get an
increase in the future.h
Orrfs plan does not say how much would be saved, according to a draft of the
proposal.
A spokeswoman for the pension system says officials still are studying the
plan. gIt really just caught us completely off guard,h said Tina Bassett. gIt
was the first time we saw it.h
But any changes could take as long as two decades to make a dent in how
Detroitfs long-term debt is structured, according to Michael Sweet, a bankruptcy
attorney with Fox-Rothschild.
Moving from a defined benefit to a defined contribution plan gisnft going to
change the savings tomorrow,h Sweet said. gKevyn Orr is working on all sorts of
different things. One is to address the short term issues and deal with the
longer term imbalance of the budget.h
Private companies long ago starting shedding plans that relied heavily on
employer contributions in favor of those where workers decide how much of their
pay they want socked away. As cities and states continue to buckle under the
pension and health care liabilities, elected leaders are pushing for similar
changes.
gSomething has to be done because the pensions are extremely expensive and
with the aging demographic, those costs just keep going up,h said Deidra
Krys-Rusoff, a portfolio manager with Ferguson Wellman, an Oregon-based capital
management firm.
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